Notes to Consolidated Financial Statements

NOTE 12

FINANCIAL INSTRUMENTS

Derivatives

The ongoing effect of SFAS No. 133 and related amendments and interpretations
on our consolidated financial statements will be determined
each period by several factors, including the specific hedging instruments
in place and their relationships to hedged items, as well as market
conditions at the end of each period.

Interest Rate Risk Management

We have entered into domestic interest rate swaps to achieve a targeted
mix of fixed and variable rate debt, where we principally receive fixed
rates and pay variable rates based on LIBOR. These swaps hedge against
changes in the fair value of our debt portfolio. We record the interest rate
swaps at fair value in our balance sheet as assets and liabilities and adjust
debt for the change in its fair value due to changes in interest rates.

We also enter into interest rate derivatives to limit our exposure to interest
rate changes. In accordance with the provisions of SFAS No. 133, changes
in fair value of these cash flow hedges due to interest rate fluctuations
are recognized in Accumulated Other Comprehensive Loss. Amounts
recorded to Other Comprehensive Income related to these interest rate
cash flow hedges for the years ended December 31, 2007, 2006 and 2005
were not material.

Net Investment Hedges

During 2007, we entered into foreign currency forward contracts to hedge
a portion of our net investment in Vodafone Omnitel. Changes in fair
value of these contracts due to Euro exchange rate fluctuations are recognized
in Accumulated Other Comprehensive Loss and partially offset
the impact of foreign currency changes on the value of our net investment.
As of December 31, 2007, Accumulated Other Comprehensive Loss
includes unrecognized losses of approximately $57 million ($37 million
after-tax) related to these hedge contracts, which along with the unrealized
foreign currency translation balance on the investment hedged,
remain in Accumulated Other Comprehensive Loss until the investment
is sold.

During 2005, we entered into zero cost Euro collars to hedge a portion
of our net investment in Vodafone Omnitel. During 2005, our positions
in the zero cost euro collars were settled. As of December 31, 2007 and
2006, Accumulated Other Comprehensive Loss includes unrecognized
gains of $2 million in each year related to these hedge contracts, which
along with the unrealized foreign currency translation balance of the
investment hedged, remain in Accumulated Other Comprehensive Loss
until the investment is sold.

Other Derivatives

On May 17, 2005, we purchased 43.4 million shares of MCI common stock
under a stock purchase agreement that contained a provision for the
payment of an additional cash amount determined immediately prior to
April 9, 2006 based on the market price of Verizon’s common stock. Under
SFAS No. 133, this additional cash payment was an embedded derivative
which we carried at fair value and was subject to changes in the market
price of Verizon stock. Since this derivative did not qualify for hedge
accounting under SFAS No. 133, changes in its fair value were recorded in
the consolidated statements of income in Other Income and (Expense),
Net. As of December 31, 2006, this embedded derivative expired with
no requirement for an additional cash payment to be made under the
stock purchase agreement. During 2006 and 2005, we recorded pretax
income of $4 million and $57 million, respectively, in connection with this
embedded derivative.

Concentrations of Credit Risk

Financial instruments that subject us to concentrations of credit risk consist
primarily of temporary cash investments, short-term and long-term
investments, trade receivables, certain notes receivable, including lease
receivables, and derivative contracts. Our policy is to deposit our temporary
cash investments with major financial institutions. Counterparties
to our derivative contracts are also major financial institutions. The financial
institutions have all been accorded high ratings by primary rating
agencies. We limit the dollar amount of contracts entered into with any
one financial institution and monitor our counterparties’ credit ratings.
We generally do not give or receive collateral on swap agreements due
to our credit rating and those of our counterparties. While we may be
exposed to credit losses due to the nonperformance of our counterparties,
we consider the risk remote and do not expect the settlement of
these transactions to have a material effect on our results of operations
or financial condition.

* This is an interactive electronic version of Verizon’s 2007 Annual Report to Shareowners, and it is intended to be complete and accurate.
The contents of this version are qualified in their entirety by reference to the printed version. A reproduction of the printed version is
available in PDF format on this website.